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Bloomberg: Saudi Debt, Deficit Rising

Saudi Arabia has the world’s lowest debt to economic output ratio–at least for now.
With oil prices tumbling and the country burning through currency reserves at a record pace, economists from Bank of America Merrill Lynch to Abu Dhabi Commercial Bank expect authorities to start raising money through the local bond market to cover a widening budget deficit.
The potential sales will help create a benchmark for corporate borrowers. They may also be a boon for investment bankers after bond issuances in the six-nation (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE) (Persian) Gulf Cooperation Council dropped by 34% this year to $15.2 billion, data compiled by Bloomberg show.
“At the moment, they’re tapping their reserves and it’s certainly something you could see coming,” said Monica Malik, chief economist at ADCB in Abu Dhabi. “You’d expect a gradual build-up in debt.”
The world’s biggest oil exporter hasn’t sold securities with a maturity of more than 12 months for eight years as it used the windfall from crude exports to slash its debt to GDP ratio to less than 2%.
Government-linked agencies and companies typically tap the Shariah-compliant debt market. Sales are likely to be denominated in local currency, Malik said.
“Saudi Arabia does have an advantage over many regional peers in that they have large domestic institutional investors that could support debt markets,” said Mohieddine Kronfol, the Dubai-based chief investment officer for global sukuk and Mena fixed-income at Franklin Templeton Investments. “They have pension funds, insurance companies and large family offices.”

Deficit to Widen
The IMF estimates that the country’s budget deficit will widen to about 20% of economic output this year after King Salman ordered a two-month bonus for public-sector workers and pensioners.
The government is pressing ahead with an investment program to boost non-oil GDP growth. Military spending is likely to rise as the country leads airstrikes against Shiites in Yemen.
For now, the government is financing its budget shortfall by drawing down its deposits at the central bank, accelerating the decline in currency reserves. Net foreign assets dropped more than $11 billion in April, taking their three-month plunge to more than $45 billion–about 7% of the total.
Officials haven’t announced plans to tap the bond market. If the country chose to tap the international sukuk market, the sale will be very “well received” by investors, Abdul Hussain, chief executive officer of Mashreq Capital DIFC, said by phone from Dubai. The country is rated AA- at Standard & Poor’s, the fourth-highest investment grade.
“They have a very strong credit rating, very little external debt,” said Hussain. “You could not get a stronger profile in the neighborhood.”